Bitcoin and Blockchain will reveal their actual good in 2018

Bitcoin was first explained to the public as a form of digital money, and that is how its successors and competitors—like Litecoin, Filecoin, and Ether—have been framed as well. Each of these “currencies” resembles traditional money in certain ways—they’re abstractions of economic value; they can be traded; they each use unique symbols. But none of them is suited to playing the most basic role of currency, as a relatively stable medium of exchange—that is, as a simple way to buy and sell stuff. There’s too much friction involved. Each transaction takes too long, uses too much energy, and involves too many risks. (Bitcoin, for instance, is shockingly easy to lose—one misplaced password and you’re in trouble.)

Nearly a year ago—back when Bitcoin was trading for a mere $1000 and people rolled their eyes!—Cade Metz was arguing in Wired that “Bitcoin will never be a currency.” But that idea isn’t dying gently. Here, for instance, is the latest sad tale of a Bitcoin owner who tried to sell some of his holding and found himself in a labyrinth of trouble. As he lamented on Twitter, “It’s still either super complex to use, either woefully insecure and/or unsafe. but now you also have ridiculous high fees, long confirmation times, super impractical exchanges with zero privacy.” (His Twitter ID says he’s a Google engineer, so he’s likely neither a rube nor a technophobe.)

In 2018, the smartest move on the part of companies making ICOs and Bitcoin-related products will be to wean the public and the media off the “digital cash” concept. It’s a metaphor that no longer makes sense, and it’s getting in the way of our properly understanding a new technology that’s looks like money but really isn’t.

The biggest problems with Bitcoin have emerged because the mechanics of buying and holding bitcoins are so inscrutable that nearly everyone pays third parties to handle them. Those wallet-service middlemen become points of failure for the whole system. They get hacked; their systems go down; they get ordered by governments and regulators to report transactions that users thought would be anonymous.

In 2018 you can expect to see an escalating competition among providers of these wallet services to earn users’ trust. It won’t be easy, since the inflation in Bitcoin’s price has driven a frenzy of participation that strains these companies’ capacities. But if the Bitcoin world doesn’t solve this problem, it will sour the entire industry’s prospects, as it crops up for each new coin or token that catches fire.

Each of these three challenges that cryptocurrencies face comes down to a question of trust. Ironically, the libertarian dreamers who conceived of Bitcoin and its brethren imagined a world of “trustlessness,” in which you didn’t have to assess the reputation of the counterparty in any transaction, or any middleman institution, because the whole process was guaranteed by the blockchain’s irrefutable, crypto-secured record. But nothing that’s happening in the world of ICOs and Bitcoin today has moved us any closer to such a trustless state. People are still making gut-driven bets based on faith: Is my wallet company the most reliable? Which token is most likely to last and appreciate? Which developers are moving in the smartest direction?

Those bets will continue as long as the market keeps rising. The cryptocurrency boom has been built on abundance—both in capital (because interest rates have been so low for so long) and in technical resources (because there were lots of idle CPUs before the cryptocurrency frenzy commenced). As BitTorrent inventor Bram Cohen says, “Bitcoin does a very good job of wasting every available resource it can get its hands on.” The technical resources have begun to dwindle, which is why gamers have to pay more for their graphic cards—the Bitcoin miners have bought up all the hardware. The slightest whiff of a financial crisis will tighten the available financial resources, too. The real test for cryptocurrencies, next year and beyond, will be whether they can evolve to be more efficient. Remember: The Cambrian Era ended in mass extinction.